Banks earn massive profits through ‘customer protection’

A damning new report from the investment bank Morgan Stanley has revealed the full extent of the huge profits being made by banks through the sale of payment protection insurance (PPI).

The report estimates that a fifth of banks’ profits are made from these controversial policies, which are sold to customers alongside credit cards and personal loans.

Recently, the Financial Services Authority revealed that it is to review the sales of these policies, which promise to cover repayments to credit cards or loans if the customer is unable to make repayments due losing their job or being unable to work due to ill-health.

Payment protection insurance (PPI) has been the subject of much criticism recently for being overpriced and full of exclusions that, prior to sale, are often not pointed out to customers. A recent report into the selling practices of PPI by Lloyds TSB, found that when applying for a loan or credit card through the bank, customers were often told that PPI was compulsory when in actual fact it is not. The Financial Ombudsman and Which have both criticised the tactics often used to sell these policies.

Customers are often unaware of the large commissions these policies earn banks. According to Morgan Stanley, the cost of this insurance can, in some cases, raise the APR on a typical £10,000 loan from 7.9 per cent to 23.6 per cent.

The report estimates that Lloyds TSB earns 17 per cent of its profits before tax from PPI sales, which equates to £595m of annual total pre-tax profits of £3.5bn.

Alliance & Leicester earns 12 per cent of its profits from PPI sales while HBOS earns 11 per cent of its profits from the sale of these policies, compared with 7 per cent at Barclays and just 4 per cent at the Royal Bank of Scotland.

The report comes at a time when lenders have come in for fierce criticism from financial experts and consumer groups over their role in Britain’s rising consumer debt problem. The report’s conclusions are now likely to fuel these criticisms even further, especially with banks making huge profits at the expense of consumers.

The lending sector will now come under heavy scrutiny as the Competition Commission, in addition to the FSA investigation, will review the sale of PPI linked specifically to store cards. Lenders face even more pressure as The House of Commons Treasury Committee has previously stated it wants the Office of Fair Trading to investigate sales of PPI.

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